Gasoline Subsidy? Think Again (Revisited)

Yep, it's kinda late to talk about this. But my gut is somehow tingled when I (still) heard about people on Twitter complaining about the proposal of limiting the consumption of subsidized gasoline per April 1st, 2012.

Most of the whining came from private car owners, asking for treatment as if they are poor people who need subsidy. As one of major causes of pollutions and traffic congestion, especially in Jakarta, my first thought will be, "Bitch please." They ARE NOT justified to receive the benefit from subsidy, taking into account their financial capability and negative externalities that they cause. They sound very similar like corruptors who steal poor people's money.

Arguably, in-kind subsidy (subsidy that attached to a commodity) like gasoline subsidy brings bigger dead-weight loss than direct transfer to poor people. Why? Since this subsidy doesn't discriminate the financial capability of the receiver, it gives the chance for those who actually aren't qualified for subsidy to receive the benefit, like those car owners. Even worse, since rich people consume more fuel, most of the subsidy is spent on these rich households instead of the poor. Banning these car owners to buy subsidized gas will reduce the gasoline consumption up to 14 millions kiloliters and save up to 28 trillions rupiahs in government budget that can be allocated elsewhere, like in education, health care, better public transportation service and infrastructures (to attract people to use it instead of using their own cars,) and poverty alleviation.

Then how to deal properly with the inflation that may ensue? First, we can slowly phase-out the subsidy, allowing society to have time to adjust with the price. Government must follow this with the launching of public relations campaign, broadcasting the explanations of the need for the oil price increases. Second, we can do targeted assistance for poor people as what we did in 2005. We were able back then to give direct cash benefits for approximately 15.5 millions of poor people (roughly 28% of the population.) This was not without problem, though, as there were mistargeting (the cash was randomly distributed to the poorest 40 percent rather than the initially targeted 28 percent,) and leakage (some people who were supposed to not receive subsidy received it.) That's why the preparatory work to identify beneficiaries and design effective and efficient ways to deliver assistance should be given top priority. Government then must empower her citizens to provide assistance and monitoring for this program. Thirdly, government must allocate this 28 trillion rupiahs of budget to provide better and cheaper public services for her citizens, so that even though the gasoline price is high, the cost for citizens to have decent education/health care can be reduced substantially. This requires the participation of both government and citizens (including NGOs and independent monitoring groups) to ensure the accountability and transparency from the budgeting process to its executions.

We were successful back then in 2005, now it's time to do it again, as oil price will keep on increasing in the future. We must realize that the reliance on gasoline subsidy is very unsustainable for both the societies and government.

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Addendum:

It has become government's decision not to prohibit car owners from buying subsidized gasoline, but also to increase its price altogether from IDR 4,500 per liter to 6,000 per liter. My responses for this is still the same as above, however, there are some things that must be dealt.

First is the accusation that oil pricing that is used by Ministry of Finance is downright wrong. Some of the rationales used are the comparison of oil production cost structure between Indonesia and other countries and that we actually book profit even with today's price. But we can see that currently Indonesia is a net importer country when it comes to oil (thus using world's oil price as a standard of pricing gasoline is not wrong,) and the second calculation didn't take into account recoverable cost and net contractor share.

But let's say that the calculations above are right, that we have surplus on oil, I can't imagine how people can be so egoistic.

Why? Firstly, even if it's surplus, with the current economical growth of Indonesia (thus oil consumption will keep on increasing) and the fact that oil is a very scarce commodity, isn't it better if we also save it for our future generations? Since government's appeal asking people to reduce oil consumption is not effective, price comes as a stronger negative incentive to shift her people's consumption patterns. With that, not only we save the oil for future, if consumption of oil in Java (as the biggest oil consumer in Indonesia) is reduced significantly, there are more oil to be distributed outside Java, in which in some anecdotal reports gasoline is difficult to get and its price can reach up to IDR 6,000-12,000 even when in Java it's just IDR 4,500. Secondly, I believe there will be incentive to look for other alternative souces of fuel. People in Indonesia are mostly oblivious and lulled by subsidized gasoline. They are unaware of the environmental impact (pollution) and scary economic consequences if we keep subsidizing oil: in the future, assuming we keep the price on IDR 4,500 per liter, the moment when unsubsidized gasoline actual price is so high that we can no longer subsidize it (for instance IDR 12,000 per liter,) the sudden blows of 167% of price increase will cripple the economy even worse than if we slowly phasing out the subsidy little by little, perhaps IDR 500 per year.*

Second, on the effect of increased oil price. It's correct that increased oil price will trigger inflation. But let's see the case in 2005. Even when gasoline price increased almost 100% at that time, inflation rate was just around 17,1% in 2005, and next year was down to a mere 6,60%. How could that happen? Because fuel is a variable cost thus will not severely cripple purchasing power.

Let's say Mr. A sells bakso using his motorcycle, expecting inflation, he increase the price of his product 500 rupiah per bowl. It means he has some added revenues to cover the costs of increased oil and/or other commodities prices, his purchasing power is not affected. But for some people, this adjusting period when price is still sticky will indeed decrease their purchasing power. For instance, when people are paid every month, thus their current wages can't keep up with the inflation, or when price shock occurs; there comes the direct cash aid. During these adjusting periods (goverment says it's for 9 months), we flow some cash to compensate their costs first. And after that, we can allocate the money for infrastructure, public transportations, job creations, and other social safety nets, so that even though there is price increase, cost for other basic needs like health care and education can be reduced.

Government can also manage inflation as long as she can keep the money supply steady**. And this is why I don't oppose government proposal. Oil price is increasing and so the cost of subsidizing it is increasing; I am sure that these activists will vehemently reject if we add more loan or increase tax. So from where must the money to cover the subsidy come from? I dare to challenge those who oppose this proposal to come up with solutions:

What will YOU do as government in facing this situation?

Post scriptum

*) My personal observation tells me that cigarettes price is steadily increasing, yet no one is protesting against such increases. Most Indonesian smokers is not that burdened to buy a pack of cigarettes costing IDR 12,000 PER DAY, which may cost that person IDR 3,6 to 4,4 milion per year. My personal observation also tells me that usually most people buy fuel at max IDR 50,000 per week, only IDR 2,6 million per year. It's still LESS than the money spent on cigarettes.

**) I am tempted to say that using monetarism approach, we must increase interest rate. This is bad, as loans will be more burdenful, and may cause double-blow for enterpreneurs. However, using Keynesian approach to increase tax may not be good either, as tax decreases disposable income (and when in times of inflation, person who are caught in fiscal drag may suffer even further.)